Question

Explain the difference between a prepayment and an accural

Answer 1

Answer-

Differences between Prepayment and an Accrual

Prepayments are of two types Prepaid income and Prepaid expenses, whereas Accruals are classified as  Accrued revenue and Accrued expenses.

Prepaid income is the amount that is  received from a customer prior to the provision of goods or services. The goods are not yet delivered by the seller so it appears on the balance sheet of the seller as a current liability.

Accrued revenue is earned by providing goods or service, for which no cash has been received and are recorded as receivables on the balance sheet.

The Prepaid expense is paid initially and expensed later whereas the Accrued expense is expensed first and paid later ie. expense that has been incurred but not yet paid is shown as a liability in the balance sheet and an expense in the Income statement.

Prepaid expenses are classified as assets and the advance payments for goods and services that are to be used in the future period and accruals are liabilities that have been incurred initially but have not been paid by the end of period.

In Balance sheet Prepayments are in Current assets section and Accruals are in Current Liabilities section.